What Are the Benefits of Forex Trading?
It has become a popular trend among investors. But what is it and how does it work?
If you have browsed the internet looking for information about investing, you have probably seen those ad banners with eye-catching graphs offering forex trading.
Without a doubt, this has become a popular trend among investors as more people are heading towards it. But what is forex trading? How does it work? Here you’ll learn everything you need to know about it.
Nevertheless, before getting deep into forex trading, let’s understand some basic terms involved around it.
- Currency: it is the system of money used in a country. For example, the currency for Spain is the euro.
- Currency Pair: it’s the quotation of one currency against another. For example, the currency pair between euros and US dollars is EUR/USD.
- Exchange Rate: it is the value at which you exchange one currency for another. For example, the exchange rate for May 29th, 2021, is 1 US dollar equals 0.82 euros.
Read also: 50 basic financial terms you should know
Great! Now that we know some of the basics let’s talk about what forex trading is.
What is forex trading?
The term ‘forex’ comes from the abbreviation of ‘foreign exchange.’ Also known as foreign trading, it is a market where you can buy and sell currency from countries with the best economic positions.
You have probably been part of transactions like these without even noticing it. One of the most common examples of foreign exchange is when you change your local currency for one belonging to your next vacation destination.
However, if you are looking to dive into forex to make a profit, you should get familiar with the main currencies negotiated in the market. Depending on the market’s volatility, a forex trader could cause some significant gains with these currencies.
- USD - United States Dollar
- EUR - Euro
- JPY - Japanese Yen
- GBP - Great Britain Pound
- CHF - Swiss Franc
- CAD - Canadian Dollar
- AUD - Australian Dollar
- NZD - New Zealand Dollar
Let’s look at an example.
Let’s say you have 100 US dollars in your savings account, and you decide to exchange them for euros. You buy one euro for each of your dollars (this means the exchange rate is 1 USD = 1 EUR). The next day, the euro’s value increases by 20%, so you decide to exchange your 100 euros back. You receive US dollars again, but thanks to the market’s volatility, now you have 120 USD, which means you earned 20% on the amount you invested.
Benefits of forex trading
- Liquidity: The forex market is the most liquid and largest globally, meaning that money is being constantly traded.
- It is always open: The forex market is the only market that never sleeps during labor days. This means that you can trade at any moment during the day, even at dawn!
- Easy access: You can have easy access to forex trading through different digital platforms. You can also receive help and advice from various brokers.
- Lower costs: Forex trading has lower related costs in comparison to other investment opportunities.
- Demo accounts: You can practice first. Some online forex brokers allow having demo accounts. This way, you can practice and gain experience before opening a real account and put your money on the line.
- Leverage: You can usually get high leverage with forex. This means you can ask your broker for a credit to make more significant investments.
The bottom line
We finally answered the question, “what is forex trading?” It is an excellent alternative to the stock market.
Being part of the forex market can bring you some good benefits. However, like everything in life, you should be prepared.
Gather all the information you can, take advantage of demo accounts, and put on some practice. Once you start trading for real, you’ll notice that hard work pays off.
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